First of all, is this true? I mean it's one of the claim of one US presidential candidate.

I suppose that the reason is because IT company can shift their profit to offshore companies.

Why can't normal companies do the same?

Why can't all restaurants set up corporation in Seychelles and pay "royalty" to their Seyschelles company?

What is so special about tech companies that allow them to avoid taxes.

Some source: https://www.youtube.com/watch?v=nzPoDCmYmwI he claims here that tech companies are hard to tax

I also know that Microsoft, google, and Apple pays very little taxes.

I also know that tech companies do not need infrastructure as much as non tech companies. However, that would make sense if government tax land, or gasoline for example. If government tax income, I do not see why normal companies have harder timer avoiding tax.

We also need to take into account tax evasion. While normal companies often deal with many other companies around, tech companies often deal globally with people around the world. However, I am not seeing that tech companies are evading tax illegally. It seems that they legally avoid paying taxes.

  • The substance of DaleM's answer is spot on about the primary reason that this is true. But, to add to his answer, it is indeed true. Brick and mortar businesses like department stores, groceries stores and retailers like Wal-Mart pay tax on virtually 100% of their accounting profit. Many tech companies pay little or no tax on their accounting profits. – ohwilleke May 3 '18 at 12:44
  • "I am not seeing that tech companies are evading tax illegally. It seems that they legally avoid paying taxes." This is also true. In general, it is much harder to illegally avoid evade taxes in a large business because the cost-benefit to auditing large businesses is high, so they don't get away with as much (they are also more vulnerable to qui tam type actions brought by whistle blowers) and because large businesses need accurate accounting systems to function profitably. – ohwilleke May 3 '18 at 12:56
  • OP, the government does tax land and gasoline. And another reason for the phenomenon you describe is, generally, tech firms have far fewer assets subject to personal property taxes, such as manufacturing equipment, etc. – A.fm. May 4 '18 at 22:04

A substantial part of the value of the goods and services provided by tech companies is in intangibles.

For example, this analysis suggests that approximately 1/3 of the price of an iPhone is in materials and labour and the rest is in the patents, copyrights and brand value that the names "Apple" and "iPhone" provide. If these intangibles are owned by, say, Aplle (Ireland) then Apple (USA) will have to pay them to use them - whatever amount those two companies agree on will reduce Apple (USA)'s profit and raise Apple (Ireland)'s profit - the tax rates in each of these countries is not the same.

Now, tax law says that such transfers have to be at fair market value. So, what is the fair market value of all the IP needed to build an iPhone? Or the value of the names "Apple" and "iPhone"? You don't know, I don't know, Apple doesn't know and the tax authorities don't know. Whatever figure they pick is defensible as "fair market value" because there isn't actually a market - fair or otherwise.

Resteraunts can do this too - McDonald's (Australia) pays a licence fee to use the name "McDonalds" but this is the only intangible McDonalds have - there is no patent on how to make a hamburger - so the scope for them to take advantge of this is less than for tech companies.

  • A secondary reason is that tech companies benefit from the R&D tax credit. One of the significant ways that brick and mortar companies play this kind of game is by setting up "captive insurance companies" that convert domestic compensation into offshore tax free/low tax profits, but this is isn't nearly as effective as licensing intellectually property. Yet another trick (useless to tech companies but helpful for industrial companies) is to set up interest expense obligations in a way that is localized to operations in countries with high tax rates and financing with equity when taxes are low. – ohwilleke May 3 '18 at 12:51

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